Fitch Ratings has revised the Outlook on Guaranty Trust Bank Plc's (GTB) Long-Term Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at 'B+'. Fitch has upgraded GTB's Long-Term National Rating to 'AA(nga) from 'AA-(nga)'. All GTB's other ratings have been affirmed. A full list of rating actions is at the end of this rating action commentary.

The revision of GTB's Outlook to Stable mirrors the recent action on Nigeria's 'B+' sovereign rating (see 'Fitch Revises Nigeria's Outlook to Stable; Affirms at 'B+' dated 2 November 2018). The upgrade of the Long-Term National Rating reflects improvement relative to Nigerian peers.

Key Rating Drivers

IDRS, Viability Rating, National Ratings And Senior Debt

GTB's IDRs are driven by the bank's intrinsic creditworthiness as defined by its Viability Rating (VR). GTB's VR is the highest assigned by Fitch to a Nigerian bank. Like all Nigerian banks, GTB's VR is constrained by the operating environment in Nigeria. The fragile economic recovery restrains banks' growth prospects and asset quality. The VR considers GTB's strong financial metrics and comfortable capital buffers. The VR also considers a highly concentrated loan book.

GTB is one of Nigeria's largest banks, controlling an overall domestic market share of approximately 11%. The bank's VR reflects solid financial metrics that compare well with other large Nigerian banks. Earnings metrics are especially strong and GTB is the country's most profitable bank. It consistently achieves an annual operating return on average assets in excess of 5%.

Strong earnings support capitalisation and capital adequacy is a rating strength. GTB was able to absorb NGN82.9 billion (USD272 million), equivalent to approximately 13.5% of consolidated end-2017 equity, of additional expected credit loss provisions required in line with IFRS 9. The bank continues to report a high Fitch Core Capital (FCC)/risk-weighted assets ratio of 22.9% at end-June 2018.

Asset quality compares well with peers. The impaired loans/total loans ratio, which spiked at 7.7% at end-2017, had improved to 5.8% at end-June 2018 following the reclassification of some highly reserved exposures. GTB's IFRS 9 Stage 2 loans were equivalent to approximately 11% of loans at end-June 2018, which is broadly in line with its close peers.

Single borrower and sector concentrations are significant, as is common in Nigeria, exposing the bank to unexpected credit losses. At end-June 2018, the top 20 exposures were equivalent to approximately 46% of gross loans. Approximately one-third of GTB's loans are extended to the oil sector, and while stronger oil prices are currently supporting the debt servicing capabilities of oil-related borrowers, oil price trends can be volatile. Given this, we view positively GTB's loan loss reserve policies, where coverage of impaired loans reaches approximately 140%.

Market risk is well controlled and risk management tools are well developed. Relative exchange rate stability in 2017 and 2018 reduced the impact of exchange rate fluctuations on profits and balance sheet ratios, but currency volatility risks can be sizeable. GTB is positioned to benefit from naira depreciation as 50% of assets and approximately 40% of liabilities are denominated in foreign currency, mainly US dollars.

GTB's balance sheet is liquid. The bank's loan deleveraging strategy is likely to continue into 2019 and we expect deposit inflow to continue to be invested into Nigerian government securities. We consider liquidity to be sound in both foreign and local currency.

GTB's National Ratings reflect its creditworthiness relative to the best credits in Nigeria. GTB's National Ratings consider stronger financial metrics than almost all peers.

The Long- and Short-term Ratings on GTB Finance BV's senior unsecured programmes have been affirmed at 'B+' and 'B', respectively. The long-term rating of senior debt issued by GTB has also been affirmed at 'B+' with a Recovery Rating of 'RR4' indicating average recovery prospects.

Support Rating And Support Rating Floor

Fitch believes that sovereign support to Nigerian banks cannot be relied on given Nigeria's weak ability to provide support, particularly in foreign currency. In addition, there are no clear messages of support from the authorities regarding their willingness to support the banking system. Therefore, the Support Rating Floor of all Nigerian banks is 'No Floor' and all Support Ratings are '5'. This reflects our view that senior creditors cannot rely on receiving full and timely extraordinary support from the Nigerian sovereign if any of the banks become non-viable.

Rating Sensitivities

IDRS, Viability Rating, National Ratings And Senior Debt

GTB's IDRs are sensitive to a rating action on its VR. GTB's VR is primarily sensitive to our assessment of Nigeria's operating environment because the bulk of its activities are concentrated in its home country and correlations between the sovereign and banking sector are high. The Stable Outlook on the sovereign rating suggests changes are not expected in the foreseeable future. The VR is also sensitive to a material deterioration in asset quality. This could be triggered, for example, by oil price weakness, but this is not our base case given current price trends. GTB's National Ratings are sensitive to a change in its creditworthiness relative to other Nigerian banks.

The Long- and Short-term Ratings on GTB Finance BV's senior unsecured programme and the long-term rating on senior unsecured debt issued by GTB are sensitive to any change in GTB's IDRs.

Support Rating And Support Rating Floor

The Support Rating and the Support Rating Floor are sensitive to any change in assumptions around the propensity or ability of the sovereign to provide timely support to the bank. Given Nigeria's sovereign ratings, this is not our base case.